From the queries we receive from readers related with the changes inflicted by the recent Finance Act (FA), 2017 on ‘Income From Housing Property’, we have realised that most of the assesses have not realised that these changes do not affect the honest taxpayer much, after all.
Let us take the case of our friend Vijay who came to us for advice on ‘To Let or Not to Let’ his second house. He had worked out his plan meticulously — 1.Ask his tenant to vacate the house. 2. Prepay his loan to the bank. 3. Wife takes a loan from the same bank to be able to purchase the house from him. 4. Treat it as her self-occupied flat and claim the tax benefits thereon.
When we asked him (in a lighter vein of course) to further elaborate his logic or whether it was simply a case of him having had quarreled with his wife and desiring to live separately, he replied, “As per Sec. 23, the annual value of a house or part of a house shall be taken as nil if it (i) is in the occupation of the owner for his own residence or (ii) cannot be occupied by him because of his employment, business or profession at any other place and he has to reside at that place in a building not belonging to him. If the assessee has more than one self-occupied house, the annual value of only one of such houses, at his option, can be taken as nil. All the others will be deemed to have been let out. The option can change from year to year.”
He had obviously done some homework, but lost sight of the rental income.
To begin with let us browse through the FA17 changes.
Deduction on Interest Payable
The interest payable on capital borrowed (inclusive of processing fee) for acquiring, constructing, repairing, renewing or reconstructing the property with a ceiling of Rs 2,00,000 is deductible on loans taken for acquiring or constructing a self-occupied housing property. If an assessee has two or more residential houses, only one of these of his choice shall be treated as self-occupied. Others, even if not actually let out, will be treated as ‘deemed let out’ properties.
Earlier, interest paid on housing loan for an actually rented (or deemed to be rented) house was fully deductible. In other words, the interest amount should be first set-off from the rent received (under the head ‘Income from house property’) and the balance loss, if any, can be set-off against income under any other head.
The FA17 has inserted Subsec. (3) in Sec. 71 to put a cap of Rs 2 lakh per year on such a set-off under any other head. The balance loss, if any, can be carried forward for similar set-offs for 8 subsequent years, as per the normal provisions.
For clarity, suppose the rent received or deemed to be received is Rs 2.50 lakh and the interest paid is Rs 4.00 lakh for the year. The owner is allowed to deduct municipal taxes (assumed to be Rs 10,000 in this case) and a standard deduction of 30%. This reduces the effective income from housing property to Rs 1.60 lakh (=30% of (2.50-0.10)). If we now deduct the interest amount of Rs 4.00 lakh, loss from the housing property works out to Rs 2.40 lakh (= 1.60 - 4.00). Earlier, this entire loss of Rs 2.40 could be set-off against income under any other head. FA 17 has capped this deduction at Rs 2.00 lakh.
The balance Rs 40,000 (=2.40 – 2.00) can be carried forward for similar set-offs for 8 subsequent years.
Realise that Vijay is paying a fixed Equated Monthly Instalments (EMI) every month. This consists of two parts, one towards the interest and the other towards repayment of the capital. Understandably, at the start, the interest portion is large and it steadily goes down month after month and the repayment part increases. Consequently, the carried forward loss can be surely set-off sometime in the future fully in most cases and partially in some. Incidentally, the repayment of capital is also eligible for deduction u/s 80C.
Obviously, tax benefits on rented or deemed rented houses still remain far superior to those on self-occupied houses.
What if Vijay has yet another housing property financed through yet another loan? The same rules will apply. He can claim additional benefit of standard deduction on its rent and also the deduction offered by Sec. 23 on the interest payable on that loan.
Tenant to Apply TDS on Rent Paid to Landlord
This is yet another change inflicted by the FA17 w.e.f. January 1, 2017. At present, u/s Sec. 194-I an individual or Hindu Undivided Family (HUF) is required to apply TDS on payment of rent exceeding Rs 1,80,000 provided he is liable for tax audit u/s 44AB during the relevant year. Now, by insertion of a new Sec. 194-IB, a similar requirement has been extended to even those who are not covered by the audit. Accordingly, TDS is required to be applied @5% if the rent exceeds Rs 50,000 for a month or part of a month. In order to reduce the compliance burden, the deductor may deduct tax only once in the financial year in the month of March or the last month of tenancy if the property is vacated during the year.
Some salaried individuals claimed hose rent allowance (HRA) exemption against bogus rent receipts. Now, the employees will have to produce TDS receipts for claiming the HRA benefit.
* Both deductions u/ss 80C and 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value should be known. The interest for the years prior to the year in which the property was completed, shall be deducted in equal installments for the year during which it was completed and each of the 4 immediately succeeding years. It is obvious that this privilege of the spread is available only on loans taken for acquiring or constructing a house property. A similar facility is not available for repayment of capital u/s 80C. Pursuant to FA 2017, this spread over interest for the pre-construction period is a part and parcel of the cap of Rs 2 lakh.
* Where a capital asset is jointly owned by more than one person and the share of each one can be separately ascertained, each co-owner is to be separately assessed in respect of the portion of the capital gains arising from the transfer of asset – C. G. Ghanshamdas v CIT (1979) 116ITR212 (Mad). The same rule can be applied in respect of deductions u/s 80C for capital repayment. The interest on loans can also be claimed separately if each of the joint owners has taken separate loans.
* If the borrower takes another loan for repaying the original loan, he can still continue to claim the deduction on interest on the second loan — Circular 28 dated 20.8.69. It appears that under such a situation, the deduction u/s 80C is lost. It also appears that the new loan continues to attract the monetary and time limits of the old loan.
* Interest on unpaid interest is not deductible — Shew Kissen Bhatter v CIT (1973) 89ITR61 (SC).
* No deduction is allowed for any brokerage or commission for arranging the loan
* The interest on borrowing can be claimed as deduction only by the person who has acquired or constructed the property with borrowed funds. After the demise of the borrower, the successor, though required to honour the commitment to pay, is deprived unfairly of the tax benefits — CIT v Rajkot Seeds Oil & Bullion Merchant Association Ltd. (1975) 101ITR748 (Guj).
Fortunately, this ruling is not applicable to capital gains.
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